B. V. Mehta, Executive Director, SEA
Reflecting
changes in the economic environment, the vegetable oil complex, representing a
significant part of agribusiness, has witnessed considerable changes in business
conditions over the last 3-4 years in the wake of economic liberalisation.
It
is in this background that we must attempt to assess the current and future
drivers of oils & fats supply and demand, and then examine their effect on
global trade.
Overview
of Indian Vegetable Oil Economy :
Indian
vegetable oil economy is the fourth largest in the world after USA, China and
Brazil. Oilseed cultivation is undertaken across the country in two seasons, in
an area aggregating approximately 26 million hectares, a large part of it on
marginal lands, dependent on monsoon rains (unirrigated cultivation) and with
low levels of input usage. No wonder, yields are atrociously low at less than
one ton per hectare.
Three
oilseeds - groundnut, soyabean and rapeseed/mustard - together account for over
80 per cent of aggregate cultivated oilseeds output. Cottonseed, copra and
several other oil bearing material too contribute to the domestic vegetable oil
pool.
The
processing sector is a heady amalgam at once of the traditional and the modern,
represented by over 15,000 oil mills, 600 solvent extraction plants, 400
refineries and 200 vanaspati (hydrogenated oil) factories, not to count some
150,000 bullockdriven backyard crushing operation at the village level. The
processing technology in vogue today in different parts of the country spans
several centuries, covering as it does primary household crushing, going all the
way to expander/extruder technology in medium-scale modern factories.
The
following table show at a glance trends in India's oilseeds output, vegetable
oil production, imports over the last five years and the level of
self-sufficiency.
Oilseeds
Production and Vegetable Oil Availability
(million
tonnes)
Year Oilseed
Domestic
Clmport
Self
Production
Veg oil
Sufficiency
(9 oilseeds)
availability
(%)
2000-01
18.60*
5.85
5.00 (F) 54
(Est)
1999-00
20.90*
6.32
4.50
58
1998-99
24.70
6.91
4.39
61
1997-98
21.30
6.79
2.08
77
1996-97
24.40
7.42
1.75
81
*drought
hit
Oilseed
production has dropped from 24.7 Mn. tonnes in 1998-99 to 18.6 Mn. tonnes during
current year and so availability of domestic vegetable oil from nearly 7.0 Mn.
tonnes to 5.8 Mn. tonnes.
In
1998-99, with 4.39 million tons, India emerged as the world's largest importer
of vegetable oils, relegating China to the second place. This happened during an
excellent agricultural year (1998-99) when foodgrains output reached record 204
million tons and oilseeds output a high 24.7 million tonnes.
The
year following record imports coincided with drought conditions (among others,
oilseeds output dipped to 20 million tons and less) in the country leading to
decline in rural incomes and sharp fall (over 50 per cent) in international
vegetable oil prices; yet edible oil imports increased only marginally to 4.5
million tons; evidence of how rural incomes impact demand.
Meanwhile,
concerned over the plight of oilseed growers facing falling farmgate prices and
to arrest alarming dependence on imported oils, the government raised customs
duty on imports four times in last 15 months with the object of supporting
oilseed prices.
WTO
Bound Rate
Interestingly,
India's bound rates for edible oils are as high as 300 per cent ad valorem,
except of course on soybean oil for which bound rate is 45 per cent and rapeseed
oil 75 per cent. On all other oils (palm, sun, cotton and others), potentially,
India can raise the level of customs duty to 300 per cent.
Where
is the Indian Vegoil Complex headed ?
Today,
the Indian vegetable oil complex is at the cross-roads. It is facing several
challenges simultaneously. What are these challenges ?
On
the raw material production front :
*
Far from showing a robust growth, oilseeds output is fluctuating alarmingly;
*Yields
continue to be woefully low as cultivation, done on fragmented holdings, is not
technology driven;
*
Farmgate prices have started to depress under pressure from low-priced imported
oils;
*
In the absence of yield increases, oilseed cultivation is becoming increasingly
unremunerative and unattractive;
*
Low yields mean high cost of oilseeds production per unit area;
*
Oilseed quality issues are not adequately addressed (eg. aflatoxin in groundnut,
cottonseed; glucosinolate in rapessed/mustard);
*
Insufficient exploitation of non-traditional sources of oils (ricebran,
cottonseed, treeborne oilseeds etc.);
On
the processing front :
*
Mismatch between (low) raw material production and (large) processing capacity
leading to a situation of too much capacity chasing too few raw material
(oilseeds);
*
Fragmentation of capacities, poor scale economies, large idle capacity and
existence of antiquated methods of processing lead to cost inefficiencies;
*
High cost of raw material and processing renders products - oils and meals -
uncompetitive and affects export prospects;
*
Low priced imported oils eat into already fragile trade margins on domestic
oils;
*
no wonder, the processing industry as a whole-oil milling, solvent extraction,
refinery, hydrogenation - suffers from pervasive sickness;
In
the area of marketing and consumption :
*
Low per capita consumption of edible oils (10 kilograms), but rising gradually;
*
Extreme skewness in consumption among sections of the population-top 10 per cent
consumes 20 kgs per capita and bottom 30 per cent consumes less than 5 kgs per
capita;
*
Strong regional preference for "first press" oils with natural flavour
- example : mustard, groundnut, coconut oils;
*
Inadequate quality control and quality assurance mechanism leading to
adulteration;
*
Antiquated food laws and poor implementation;
*
Low depth and liquidity in futures markets;
*
Erosion of self-reliance in edible oils and rising dependence on imports -
currently imports constitute 45 per cent of consumption.
The
critical questions are :
Will
India live with these challenges and witness slow degeneration of its once
vibrant oilseeds based economy? Or, will it rise to face the challenges
squarely, and equip itself with global competitiveness? Tough questions these.
While there are no simple, one-step solutions to the problems of the Indian
oilseeds economy, I will attempt to crystal-gaze into the future to see where
supply and demand are poised to reach.
Demand
Drivers : Major
demand drivers in the Indian vegetable oil economy include GDP growth (and
importantly, the contribution of agricultural GDP), population growth, possible
changes in consumption pattern and of course, government policies. Each one of
them can uniquely impact demand.
We
say earlier, India's population continues to grow at 1.7 per cent per annum; and
GDP growth last three years has been 6 per cent plus. The policy makers are
aiming at 7-8 per cent GDP growth.
The
National Council of Applied Economic Research, a reputed research institution,
in a study using a multi-variable econometric regression model and taking into
account the expected per capital income growth and income elasticity of demand,
has projected the demand for edible oils under three scenarios of per capital
income-growing annually by four per cent, five per cent and six per cent.
Edible
Oils - Demand Projections for India
1999-2000
2004-05
2009-10
Per
Capital (Kgs)
Low
estimate
9.8
11.5 14.0
Medium
estimate
9.9
11.6 14.8
High
estimate
10.0
12.1 16.2
Total
Demand (million
tonnes)
Low
estimate
10.1
13.3 17.4
Medium
estimate
10.2
13.9 19.0
High
estimate
10.3
14.6
20.7
*
The projected demand growth takes into account increase in population as well as
higher per capita consumption.
*
The numbers say it all. India's domestic consumption demand for edible oils will
increase inexorably.
*
By the end of the current decade, demand can actually double under the high
growth scenario, while it will rise not less than 70 per cent under the low
estimate scenario.
Let
me enter a caveat here. The demand projections assume no change in the existing
consumption pattern. It ignores the existing skewness in consumption I referred
to earlier. If agricultural GDP continues to rise robustly and consistently in
the coming years as envisaged in the National Agriculture Policy (which means
more incomes in the hands of the large agriculture-dependent population), I
expect an even larger demand growth than projected above. Also, any policy
intervention by the government to encourage edible oil consumption among the
economically vulnerable sections (the bottom 30 per cent of population which,
incidentally, suffers from malnutrition and is in dire need of calories) can
dramatically elevate total demand to an even higher orbit. But, on current
reckoning, such sharp demand spikes are unlikely to materialise.
Simply
put, under normal circumstances, I expect India's edible oil consumption demand
to grow by anything between 5 and 6 per cent per annum over the next 5-10 year
time frame. Looking at the current consumption level, 5-6 per cent growth would
translate to an additional consumption requirement of 500,000 to 600,000 tons
per annum. Will India be able to produce an additional quantity of 500/600, 000
tons of edible oils every year from now on?
Assuming
that India wants to freeze the level of imports at the existing 4.5 million tons
and stop additional imports in future, it should produce 500/600,000 tons of
additional oil each year equivalent to 2 million tonnes of oilseeds. Is the
country geared to produce such a volume ?
Supply
Side
Given
the complexities of the Indian situation, supply estimation is a tricky affair.
Supply forecast has to take into account several variables including domestic
oilseeds output (which itself is subject to the impact of a host of factors),
government policies relating to imports, tariffs and local taxes, health of the
domestic processing industry, international prices and exchange rate of the
rupee, among others.
80
per cent of India's domestic oil output comes from the primary source that is
nine cultivated oilseeds and two major oil-bearing material (cottonseed and
copra).
The
secondary source comprises solvent extracted oils, rice bran oil, oil from minor
and tree-borne oilseeds etc. India's domestic vegetable oil production is a
function, essentially, of domestic oilseeds output. Let's seen how it has
trended over the last five years :
Oilseeds
Production
(Million
Tonnes)
Crop
96-97 97-98
98-99 99-00
2000-01
Groundnut
8.6
7.4
9.0
5.3
6.2
Rape/Mustard
6.7
4.7
5.7
6.0
4.3
Soyabean
5.4
6.5
7.1
6.8
5.2
Other
six
3.7
2.7
2.9
2.8
2.9
Sub-Total
24.4 21.3
24.7 20.9
18.6
Cottonseed
5.6
4.8
5.4
5.5
5.2
Copra
0.7
0.7
0.8
0.7
0.9
Grand
total 30.7
26.8 30.9
27.1
24.7
India's
oilseeds output shows wide fluctuations year to year and crop to crop. Output
has invariably fallen short of the target as may be evident from the fact that
production target was 25 million tons for 1998-99; 26 million tons for
1999-2000; and 27 million tons for 2000-01. Conceding that output in last two
years was drought-hit and assuming normal rainfall conditions in future, India's
domestic oilseeds output can expand by one million tons per year over the next
5-10 years from the peak level of 24-25 million tons.
An
additional oilseeds output of one million tons will yield approximately 300,000
tons of oil (assuming unchanged product-mix), well below the incremental
requirement of 500,000 to 600,000 tons. In other worlds, incremental oilseeds
output of one million tons (possible under normal weather conditions) will meet
just about 50 per cent of the additional edible oil requirement of the country.
The shortfall has necessarily to be met through additional imports.
If
India desires to freeze edible oil imports at the current level, an additional
indigenous production of 500,000 to 600,000 tons per year will have to be
organised. This will translate to production of an additional 1.5 million to 2.0
million tons of oilseeds every year, a prospect not generally perceived as
bright, under normal circumstances.
We
can thus safely conclude that under normal conditions, India's
*
domestic consumption requirement will grow by
500 / 600,000 tons;
*
domestic production will expand by 300,000 tons;
*
leading to import growth of 250/300,000 tons per year over the next 5-10 years
timeframe, if no serious efforts are made to raise domestic output.
India
will, in the foreseeable future, continue to impact global vegetable oil market
because of its burgeoning import
requirement and its perceived inability to raise indigenous production in the
short run.
However,
the future of the Indian vegetable oil sector is not going to turn out to be as
simple as the projections made above. There is, right now, among Indian policy
makers, researchers and the industry, a renewed consciousness and urge to take
the vegetable oil sector forward towards achieving global competitiveness.
A
quick look at the current scenario :
With
hike in customs duties effected on 28th February, 2001 and given the price
differences and duty differences among various oils, I expect a change in the
composition of imports. Because of low price and low duty, soyaoil has become
competitive and the most preferred oil, followed by refined palmolein which is
low priced, but bearing high duty. The preference for soya will be at the cost
of sunoil and rapeseed oil both of which are relatively higher priced and bear
higher duty.
India
is likely to import over 5.0 million tonnes during the current year and will
continue to be a major importer in the coming years. Its import volumes and
their growth (or degrowth) will depend on indigenous efforts and developments
within the country. India will continue to influence the international vegetable
oil market, one way or the other.